Updated Mar 24, 2022
What Does the The International Monetary Fund (IMF ) Do?
What Does the IMF Do?
Introduction
The international trading industry is dependent on so many factors, and it can be extremely hard to regulate. With every country having its own monetary policy, and in the wake of the economic crisis, many countries have seen drops in their international funds. In 1944, during World War II when fixed exchange rates collapsed, there was a need for drastic action. This is why in July of 1944; the International Monetary Fund (IMF) was established.
The decisions have affected people and financial institutions worldwide. However, it is an international government organisation that strives to bring back financial order when it comes to providing fair returns in terms of trade to its member nations. They hold regular meetings to discuss important issues related to international economic management.
What Is the Main Objective of the IMF?
The International Monetary Fund is based in Washington D.C. America. The current number of member countries is 189 each of which has a certain representation of the fund’s executive board proportional to their financial importance. The International Monetary Fund’s main objective is to ensure the global financial security, facilitate international trade, promote monetary cooperation, and provide opportunities for economic growth around the globe to reduce poverty.
The International Monetary Fund also acted as a body that allowed only certain member countries into the organisation. For example, countries were only allowed in the International Bank for Reconstruction and Development (IBRD) which was an initiative taken to fund the reconstruction of Europe after World War II, if they were members of the IMF.
How Does the IMF Work?
Because the International Monetary Fund aims to reduce poverty, each member country of this organisation has a certain quota. These quotas are an important factor in deciding which country holds more voting rights within the IMF. These votes are based on Special Drawing Rights (SDRs) which is a special international currency form created by the organisation. A single vote consists of 100,000 SDRs of quota in addition to basic votes.
An SDR is an artificial currency instrument that is built of important national currencies that the IMF uses for internal accounting purposes. This currency is allocated to the member countries and is backed by the credit of their respective governments. The currency allocation of each SDR is re-evaluated every five years, and the currencies used as of now are the USD, Euro, Yuan, Yen, and Pound. These might change in July 2022.
What are the Main Functions of the IMF?
The IMF introduced a system of interchangeable currencies at fixed exchange rates. The motive behind this was to foster international monetary cooperation and peace. For example, the USD was redeemable at a price of $35 per ounce, and the member nations could readjust their exchange rates up to 10%. However, any change beyond this required a go-ahead from the organisation. The three primary functions of the International Monetary Fund are:
- Surveillance
Because of the amount of data related to international economies, the IMF is obliged to provide regular updates and reports with its members on national and international levels. These forecasts are published in the World Economic Outlook. When this data is available, the members congregate to discuss fiscal, monetary, and trade policies related to stabilising the global economy.
- Capacity Building
The IMF holds regular meetings, and workshops that provide technical assistance, training and policy advice to its members through its capacity building programs. These programs train people in financial data analysis, financial modelling, financial management, and other economic subjects which help the organisation monitor global debit and credit of funds among its members.
- Lending
Countries in economic distress are given loans by the IMF to help improve their financial situations. The funds are provided by the member nations who pool in money in accordance with their quota within the fund. This money is then lent to the other nations who have a debt to the IMF and depends on whether they can forecast potential financial stability and avoid another economic recession.
Conclusion
The International Monetary Fund has done much good for many countries. However, it has also faced a fair amount of criticism for the way it carries out its activities. It is not an open membership policy, and any country wishing to join this organisation has to provide data on adequate funding and contribution. The IMF’s objectives provide hope to other struggling nations, who need its help which is why the IMF was founded in the first place.
